Happy Jobs Friday,

Just when you thought it was safe to go back in the water………After the Blue Tsunami on Tuesday evening most major US indices rallied on Wednesday despite the sharp selloff in AI related stocks. There was a violent rotation beneath the surface into other areas of the market while mega-cap tech stocks moved sharply higher given their competitive advantage with a potential slowdown in the AI buildout (balance sheet, slowing cash burn and increased value of operational assets). This helped to offset much of the tech weakness. Part of the rally also was related to a monetization of hedges that were in place ahead of the catalyst, as the consensus view was that this was the clearing event to open the door to a year-end rally, and we’ve all seen the post-Midterm election stats. The VIX fell from ~21 to under 17.

Investors took the evening to rethink the potential ramifications of an AI capex peak which has been such a driver of economic activity, earnings growth and obviously US market performance. Yesterday was an ugly risk off ugly session with broad based weakness. The S&P 500 fell 4.4% with >80% of companies ending in the red. The index brbroke below the low end of the recent range (7,500 - 7,800) and traded within 1% of its 200d ma (7,325) a level we haven’t sniffed since reclaiming it at the start of Q2. The blood bath in the AI complex continued with the ICE Semi index, memory stocks and neoclouds all down >10%. The hyperscalers which bailed out the market on Wednesday gave back most of those gains with the NYSE FANG+ index down 6%. The price action in tech was similar to the end of July and the Situational Awareness blowup, causing rumors of forced liquidations to swirl. There was a scramble for protection with VIX trading up to 28 hitting the highest level since Q1. Yields fell in a flight to safety and as markets think about the path of monetary policy should economic growth slow and the potential impact of easing of AI, tariff and conflict related inflationary pressures.